Increasing prospects for jobless recovery will test DPJ policies

About a year has passed since the subprime-mortgage-loan debacle and the collapse of Lehman Brothers triggered a global financial crisis and worldwide recession. In Japan, some indicators suggest the economy has bottomed out and may be headed toward recovery. However, the employment situation hasn’t shown any improvement and is worsening instead.

In July, the seasonally adjusted unemployment rate hit 5.7 percent, topping the previous record of 5.5 percent, and is widely forecast to rise further. This is a trend also being commonly observed in the United States and European economies. The jobless rate in the U.S. hit 9.7 percent in August and has climbed to double digits in some of the euro-zone countries.

Employment statistics are important because they determine the purchasing power of individuals — a key factor in tracking trends in consumer spending and housing investment, which account for about 70 percent of Japan’s gross domestic product. Aggregate purchasing power in households, for example, is calculated by taking the number of people with jobs and multiplying that by their wages.

So what are the current trends in Japan?

First, the number of people without jobs in July, according to figures released at the end of October, soared to 3.59 million — or 1.03 million higher than a year ago.

The number of people with jobs, on the other hand, has been declining for 18 consecutive months and is down 1.36 million from a year ago.

Meanwhile, the economic-fiscal white paper for this year touched on the issue of “labor hoarding,” in which 6.07 million people were estimated (based on January-March data) to have no work but technically remain employed.

In July, the number of firms that applied to the government’s program to subsidize employers who keep redundant workers on their payroll jumped roughly 10 percent from the previous month to 80,031, with the total workers covered rising to 2.43 million. This subsidy program, expanded by the outgoing Cabinet of Prime Minister Taro Aso, has clearly helped tame unemployment. But it cannot continue forever.

Second, workers’ incomes have fallen 7.1 percent from the previous year, and bonuses 14.5 percent. Belatedly, a decision was made to lower the salaries of public-sector workers as well. The fall in the consumer price index is often seen as a problem for the economy, but since the income of salaried workers is falling as well, the decline in prices and the appreciation of the yen — which is bringing down import prices — are in fact blessings in disguise for households.

Third, we have to realize that employment trends tend to lag behind the true state of the economy. After the Japanese economy bottomed out in the previous recession, unemployment climbed for nearly two years before leveling out at the previous record of 5.5 percent. Sure, the previous recession followed the collapse of the historic bubble economy, but we still should expect unemployment to rise for at least another 1 1/2 years in the current cycle.

Even if the economy does enter a recovery phase, Japanese companies are not expected to immediately start hiring. They already have redundant workers on the payroll and must continue streamlining to make a profit. This means Japan has entered the same kind of “jobless recovery” that is plaguing the United States.

A new Cabinet led by Democratic Party of Japan chief Yukio Hatoyama will be launched this week. Expectations are high that the first full-scale change of power in more than half a century will result in a reduction of the wasteful practices fostered during the long reign of the Liberal Democratic Party and lead to public-sector reforms.

But the DPJ’s foreign policy, especially regarding the security alliance with the U.S., remains unclear in many ways. It also needs to coordinate policies with the Social Democratic Party, whose support will be needed to secure a simple majority in the Upper House.

The LDP has advocated enlarging Japan’s economic pie first and offering bigger piece to each worker in the form of higher wages. In contrast, the DPJ has been focusing on giving child-rearing support to families and direct assistance to farmers — support it hopes will boost consumption and expand domestic demand.

The biggest problem is financial resources. Since the DPJ has promised not to raise the consumption tax rate for at least four years, doubts linger about whether administrative reforms and a reduction in wasteful spending will be enough to cover the cost of that aid.

Perhaps the best indicator of the new administration’s policy implementation capabilities — and the effects — will be the direction of the employment trend in the coming months.